Communications expert with a focus on innovative housing products. Lover of high density living and high density thinking . Get my newsletter: http://bit.ly/2Dp

Oct 3, 2017

The Two Biggest Reasons Your Apartment is so F#@king Expensive

In my last post, I lamented the death of affordable, urban housing. I posited that if there were more housing like the kind you found in Windsor Terrace, Brooklyn (my neighborhood) circa 1917, people wouldn’t be so keen to live in the burbs.

Any armchair economist could explain how housing became so unaffordable: too many people wanted to live where there is not enough housing. Demand outstripped supply.

And indeed places like Tokyo, where supply has kept up with demand, housing prices have kept level, or even decreased over time.

Zoning Out

Mark Twain said, “Buy land, because they’re not making it anymore.” And along those lines, it’s easy to assume that many cities are out of space to build. It’s also an incorrect assumption. Consider that Manhattan’s density was 25% higher in 1910 than today.

The difference between 1910 and 2010 Manhattan density has little to do with geography and everything to do with zoning and other land use restrictions.

In 1910 Manhattan, there were few restrictions for what kind of housing could be built. This lead to unsafe, inhumane, and unsanitary living condition.

Starting in 1901 with the Tenement House Act, and later in 1916 with the Zoning Resolution, the city tamped down on unregulated growth. The latter resolution combatted hyper-density, and sought to ensure that the tall buildings sprouting up all over the city would not restrict the light and air of neighboring buildings. (Similar zoning laws made their way into metropolitan areas across the country.)

A property rights revolution occurred in the U.S. Backed by environmentalist rhetoric in the suburbs and preservationist priorities in the cities, American localities increasingly restricted the rights of property owners to build. We changed from a country in which landowners had relatively unfettered freedom to add density to a country in which veto rights over new projects are shared by a dizzying array of abutters and stakeholders.

This revolution (Glaeser fails to mention) was a reaction to the scorched earth redevelopment many cities underwent in the mid 20th century. Robert Moses laid waste to countless NYC neighborhoods, and in San Francisco, urban renewal gutted neighborhoods like the Fillmore with little heed to the existing population.

The Fillmore District

Property rights activists put a halt on development, or at least made it difficult — difficulty that wasn’t problematic for a time. It was the sixties and seventies. The Bronx was burning. The Upper West Side was home to Needle Park. People were still fleeing cities faster than they were entering them.

But in the last 20 years, cities became attractive again, and wealth moved back from the burbs. But land use restrictions prevented a corresponding uptick in housing volume. As SPUR’s urban design policy director Ben Grant told the Washington Post, “When the elites decide they want to go back into the city, there’s not enough city to go around.”

It’s not that developers were unwilling to build more. It’s that land use restrictions either prevented them from doing it all, or from doing it in a cost effective manner.

Consider that Glaeser says that in most of the country, development costs are pretty close to housing prices. He uses the term minimum profitable construction costs (MPCC) to describe the return a developer can expect on a project after the costs of land, labor, materials, and profit are factored.

In 2013 San Francisco, the average MPCC unit should have been $281,000 (land, labor, hard-costs, profit). But the actual price was $800,000. This $519,000 premium, he says, was attributable to permitting, community reviews, and the various other regulatory hurdles that meet almost every new building.

The fact is that in most economically vital cities, many neighborhoods lack any developable land due to land use restrictions. The neighborhoods that do permit new development — often ones that have been recently upzoned to support greater density — are stuffed with luxury towers, whose high prices can mask the premiums land use restrictions add. But the high prices of the new developments are often a mismatch for what the market can bear, which can lead to a surpluses of luxury units.

The addition of new development without affordability creates greater competition for existing properties, which tend to be less expensive — one reason your apartment is so fucking expensive.

And Then There’re Your Neighbors

There are people who benefit from land use restrictions: the NIMBYs (not in my backyard). There are two big NIMBY buckets:

Rent-regulated NIMBYs. According to one source, “Half of the rental apartments in New York City are stabilized — about 990,000 units, with 2.6 million people living in them. Three quarters of these units were built before 1947.” In San Francisco, 72% of the rental supply is rent stabilized.

These folks often pay a fraction of market rate for their apartments, allowing them to live far more frugally than they would otherwise.

Homeowner NIMBYs. Small though their numbers might be (31% of NYC households own their homes), they have the power to move mountains in the interest of maintaining their interests (property values, maintenance of their neighborhood’s character).

Both constituencies have a lot to lose. The renter likely cannot exist in the city without their cheap rent. They can make a modest income — or no income at all — and still maintain a decent standard of living.

The homeowner has the most to lose. Not only do they enjoy affordable housing, but most of their personal wealth is tied up in their house. To encourage additional housing is to invite personal poverty. More housing reduces scarcity which might lead to a possible reduction in property values.

In fact, another paper by Ed Glaeser and UPenn’s Joseph Gyourko found that in the last 30 years, housing wealth increased “almost exclusively among the wealthiest, older Americans.” Why? Because these wealthy, older Americans were “owners at the time the [land use] restrictions were imposed.”

So both of these NIMBY factions will sit through boring community review meetings for new buildings. They’ll raise objections, waylay projects for years, and generally make the possibility of getting stuff built expediently an impossibility. They’ll do the stuff renters — who are working two jobs to make rent — will not or cannot do.

So if land use restriction is the law, then NIMBYs are the police. They help ensure nothing gets built, no significant housing supply is added to cities, and the status quo — which has direct benefits to them — does not change.

They’re the other reason your apartment is so fucking expensive!

Next time, I’ll some exceptions that might point to possible ways out of this conundrum.